At a time when the Centre is trying to increase the share of rail-based traffic, an excise department move may end up shifting container traffic away from rail to roads.

The excise department wants to impose full service tax on containerised traffic without providing the 70 per cent abatement available to cargo moving on rail. This means, in effect, the service tax will be levied on 30 per cent of the tariff. Incidentally, road transporters also get about 70 per cent abatement on service tax.

The Directorate-General of Central Excise Intelligence (DG-CEI) has used a technicality in the Finance Act 1994 -- Section 65 B (49) -- to say that container train operators offer a "support service" to the Railways, which attracts full service tax. It has issued a show-cause notice to the operators asking them to pay full service tax with effect from 2012.

Meanwhile, the Railways and container train operators are citing two clauses of the Finance Act 1994 – 65 (B) 25 and 66F – to prove that they move goods on the rail mode and support their view for attracting service tax with abatement.

WIDER IMPACT

The DG-CEI’s logic, if accepted, can jeopardise not just the container rail segment, but sectors such as cement, automobiles, petroleum products, mining and the dairy segment, which have invested in wagons to offer rail-based services, while some others have plans to invest in specially designed wagons.

Companies such as ACC, APL Vascor, Jindal Steel and Power Ltd, and Maruti Suzuki, have already made such investments.

The Railways had approved procurement of 45 rakes with an investment of over Rs. 1,000 crore to 10 customers three years ago.

Also, in the passenger segment, coach investment has been made in some premium tourist trains, such as by IRCTC in Maharaja Express, the Rajasthan government in the Palace on Wheels, the Maharashtra government in its Deccan Odyssey, and the Karnataka government in the Golden Chariot.

The excise department’s move is likely to make railway services pricier and move customers away at a time when it is already losing share to the road segment.